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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 Form 10-K
 FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO
SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2006
 or
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
 Commission File Number: 000-51512
 Cardiac Science Corporation
 (Exact Name of Registrant as Specified in its Charter)
 Delaware
    
    94-3300396(State or Other Jurisdiction of
    
    (I.R.S. EmployerIncorporation or Organization)
    
    Identification No.)3303 Monte Villa Parkway, Bothell, WA
    
    98021(Address of Principal Executive Offices)
    
    (Zip Code)
 (425) 402-2000  (Registrants Telephone Number, Including Area Code)
 Securities Registered Pursuant to Section 12(b) of the Act:
 Title of each class
    
    Name of each exchange on which registeredCommon Stock, $0.001 par value
    
    NASDAQ Global Market
 Securities Registered Pursuant to Section 12(g) of the Act: None.
 o þ
 o þ
 þ o
 o
  o þ o
 o þ
   DOCUMENTS INCORPORATED BY REFERENCE




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##### 



CARDIAC SCIENCE CORPORATION
 2006 FORM 10-K ANNUAL REPORT
 TABLE OF CONTENTS
  
 PagePART IItem 1. Business
    
    
    1Item 1A. Risk Factors
    
    
    17Item 1B. Unresolved Staff Comments
    
    
    25Item 2. Properties
    
    
    25Item 3. Legal Proceedings
    
    
    25Item 4. Submission of Matters to a Vote of Security Holders
    
    
    26PART IIItem 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
    
    
    27Item 6. Selected Financial Data
    
    
    28Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    30Item 7A. Quantitative and Qualitative Disclosures About Market Risk
    
    
    41Item 8. Financial Statements and Supplementary Data
    
    
    42Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
    
    
    80Item 9A Controls and Procedures
    
    
    80Item 9B Other Information
    
    
    80PART IIIItem 10.
Directors, Executive Officers and Corporate Governance
    
    
    81Item 11. Executive Compensation
    
    
    81Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
    
    
    81Item 13. Certain Relationships and Related Transactions, and Director Independence
    
    
    81Item 14. Principal Accountant Fees and Services
    
    
    81PART IVItem 15. Exhibits and Financial Statement Schedules
    
    
    82Signatures
    
    
    83EXHIBIT 10.8EXHIBIT 10.33EXHIBIT 10.36EXHIBIT 10.37EXHIBIT 10.38EXHIBIT 10.39EXHIBIT 10.40EXHIBIT 10.42EXHIBIT 10.44EXHIBIT 10.59EXHIBIT 10.60EXHIBIT 21.1EXHIBIT 23.1EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
  i




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##### Table of Contents



PART 1
 This Annual Report on Form 10-K contains forward-looking statements relating to Cardiac
Science Corporation. Except for historical information, the following discussion contains
forward-looking statements for purposes of the safe harbor provisions under the Private Securities
Litigation Reform Act of 1995. The words believe, expect, intend, anticipate, will,
may, variations of such words, and similar expressions identify forward-looking statements, but
their absence does not mean that the statement is not forward-looking. These forward-looking
statements reflect managements current expectations and involve risks and uncertainties. Our
actual results could differ materially from results that may be anticipated by such forward-looking
statements. The principal factors that could cause or contribute to such differences include, but
are not limited to, those discussed in the section entitled Risk Factors and those discussed
elsewhere in this report. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date of this report. We undertake no
obligation to revise any forward-looking statements to reflect events or circumstances that may
subsequently arise. Readers are urged to review and consider carefully the various disclosures made
in this report and in our other filings made with the SEC that attempt to advise interested parties
of the risks and factors that may affect our business, prospects and results of operations. The
terms the Company, us, we and our refer to Cardiac Science Corporation and our
majority-owned subsidiaries.
 
 Item 1. Business
 Overview
     Industry Background
  1




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Our Markets
   Cardiac Monitoring Market
 What is Cardiac Monitoring?
  How is Cardiac Monitoring Performed?
  What are the Challenges Related to Cardiac Monitoring?
   Defibrillation Market
 What is Defibrillation?
  2




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How is Defibrillation Performed?
  What Are the Challenges Related to Defibrillation?
       Our Products and Services
  3




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Cardiac Monitoring Products
   Electrocardiographs
  Cardiac stress testing systems
  Holter monitoring systems
  Cardiac rehabilitation telemetry systems
  Cardiology data management systems
  Related products and supplies
  4




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Services
  Advantages of our cardiac monitoring products:
  Ease of use.
 Network compatibility.
  Effective data capture.
 Improved diagnostic speed and accuracy.
 Open technology architecture.
 Defibrillation Products
  5




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Automated External Defibrillation Products
    Powerheart® AED G3 PRO
  Powerheart AED G3 Automatic
  Powerheart AED G3
  Powerheart AED G3 Plus Automatic
  6




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Powerheart AED G3 Plus
  Traditional Defibrillation Products
   Powerheart ECD
  Defibrillation Supplies and Accessories
  Services
  Advantages of our defibrillation products:
  Arrhythmia Detection.
 Variable Escalating Biphasic Defibrillation Energy.
 7




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Ease of Use.
 Reliability.
 Flexibility.
 Rugged design.
 Growth Strategy
  Exploit under-penetrated and emerging market segments
   Create opportunities through innovation
  8




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Broaden our distribution
    Leverage our services capabilities
  Pursue strategic mergers and acquisitions
  Business Advantages
  Cardiology focus.
 Commitment to innovation.
 Industry leading brands.
 9




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Leading market positions.
 Global distribution and service network .
 Our Organization
 Sales and Marketing
       10




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Customer Service and Support
   Research and Development
   Technology
    11




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Manufacturing and Supply
    Our Competition
  Product
    
    CompetitorsAEDs
    
    Philips, Medtronic, Zoll Medical, Welch AllynElectrocardiolographs
    
    General Electric, Philips, Schiller, Welch AllynCardiac stress testing systems
    
    General Electric, Philips, Welch AllynHolter monitoring systems
    
    SpaceLabs, General Electric, Philips, MidmarkCardiac Rehabilitation telemetry systems
    
    Life Sensing Intruments, Scott CareCardiology data management systems
    
    General Electric, PhilipsTraditional (non-AED) defibrillators
    
    Zoll, Medtronic, Philips
  
    
    quality, accuracy, and reliability;
    
    reputation of the provider;
    
    relative ease of use;
    
    depth and breadth of features;
    
    quality of customer support;
    
    frequency of updates;
    
    capability to assist in deployment and training;
    
    flexibility to integrate products with other devices and systems from multiple vendors;
    
    availability of third-party reimbursement;
    
    conformity to standards of care; and
    
    price.
  12




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Third-Party Reimbursement
   Government Regulation
  
    
    product design and development;
    
    product testing;
    
    product manufacturing;
    
    product labeling and packaging;
    
    product handling, storage, and installation;
    
    pre-market clearance or approval;
    
    advertising and promotion; and
    
    product sales, distribution, and servicing.
 FDAs Pre-market Clearance and Approval Requirements.
 5 10(k) Clearance Process.
  13




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Pre-market Approval Process.
   Clinical Trials.
 Pervasive and continuing FDA regulation.
 
    
    Quality System regulation, which requires manufacturers to follow design, testing,
control, documentation and other quality assurance procedures during the manufacturing
process;
    
    Establishment Registration, which requires establishments involved in the production
and distribution of medical devices, intended for commercial distribution in the U.S.
to register with the FDA;
    
    Medical Device Listing, which requires manufacturers to list the devices they have
in commercial distribution with the FDA;
 14




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
    
    Labeling regulations, which prohibit misbranded devices from entering the market,
as well as prohibit the promotion of products for unapproved or off-label uses and
impose other restrictions on labeling; and
    
    Medical Device Reporting regulations, which require that manufacturers report to the
FDA if their device may have caused or contributed to a death or serious injury or
malfunctioned in a way that would likely cause or contribute to a death or serious
injury if it were to recur.
  
    
    fines, injunctions, and civil penalties;
    
    mandatory recall or seizure of our products;
    
    administrative detention or banning of our products;
    
    operating restrictions, partial suspension or total shutdown of production;
    
    refusing our request for 510(k) clearance or pre-market approval of new product versions;
    
    revocation of 510(k) clearance or pre-market approvals previously granted; and
    
    criminal penalties.
 International Regulation.
   15




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Intellectual Property
    Employees
  Foreign Operations
  Available Information
  16




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Item 1A. Risk Factors
 Our stock price is volatile, and you may not be able to sell your shares for a profit.
  
    
    actual or anticipated variations in quarterly operating results;
    
    changes in financial estimates or recommendations by securities analysts;
    
    conditions or trends in medical devices and diagnostic cardiology products markets;
    
    announcements by us or our competitors of significant customer wins or losses, gains or
losses of distributors, technological innovations, new products or services;
    
    announcements by us or our competitors of significant acquisitions, strategic
partnerships, joint ventures or capital commitments;
    
    additions or departures of key personnel;
    
    sales of a large number of shares of our common stock;
    
    adverse litigation;
    
    unfavorable legislative or regulatory decisions; and
    
    general market conditions.
  We may be unable to maintain profitability, which could result in a decline in our stock price
  We may be unable to increase sales of our cardiac monitoring products and services, which could
cause our stock price to decrease.
  We are subject to many laws and governmental regulations and any adverse regulatory action may
materially adversely affect our business operations and financial results.
  
    
    take a significant amount of time;
    
    require the expenditure of substantial resources;
    
    involve stringent clinical and pre-clinical testing;
    
    involve modifications, repairs or replacements of our products; and
 17




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
    
    result in limitations on the proposed uses of our products.
   The unpredictability of our quarterly revenues and operating results may cause the trading price of
our stock to decrease.
  
    
    the impact of acquisitions, divestitures, strategic alliances, and other significant
corporate events;
    
    changes in our ability to obtain products and product components that are manufactured
for us by third parties;
    
    delays in the development or commercial introduction of new versions of products;
    
    the ability to attain and maintain production volumes and quality levels for our
products and product components;
    
    effects of domestic and foreign economic conditions on our industry and/or customers;
    
    changes in the demand for our products;
    
    varying sales cycles that can take up to a year or more;
    
    changes in the mix of products we sell, which could affect our revenue levels as well as
our gross margins;
    
    unpredictable budgeting cycles of our customers;
    
    delays in obtaining regulatory clearance for new versions of our products;
    
    increased product and price competition;
    
    the impact of regulatory changes on the availability of third-party reimbursement to
customers of our products;
    
    the loss of key personnel;
    
    the loss of key distributors or distribution companies;
    
    seasonality in the sales of our products;
    
    the impact of pending litigation and related expenses;
    
    the impact of longer buying cycles; and
    
    the impact of employee turnover.
  If we are unsuccessful in developing and commercializing new versions of our products, our
operating results will suffer.
  18




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
    
    accurately assess customer needs;
    
    develop products that are functional and easy to use;
    
    quickly and cost-effectively obtain regulatory clearance or approval;
    
    price competitively;
    
    manufacture and deliver on time;
    
    control costs associated with manufacturing, installation, warranty and maintenance;
    
    manage customer acceptance and payment;
    
    limit demands by our customers for retrofits;
    
    access new interface standards needed for product connectivity;
    
    anticipate and meet demands of our international customers for products featuring local
language capabilities; and
    
    anticipate and compete effectively with our competitors efforts.
  We rely primarily on our distributors to generate sales of our products; if we do not maintain our
relationships with distributors or they fail to successfully distribute our products, our sales and
operating results will likely suffer.
  Interruption or cancellation of supply, and our inability to secure alternative suppliers on a
timely basis, would likely harm our ability to ship products to our customers, decrease our
revenues and increase our costs.
  Inadequate levels of reimbursement from governmental or other third-party payers for procedures
using our products may cause revenues to decrease.
  19




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Our business is subject to intense competition, which may reduce the demand for our products.
  
    
    greater financial and technical resources;
    
    greater variety of products;
    
    greater product pricing, discounting and bundling flexibility;
    
    patent portfolios that may present an obstacle to our conduct of business;
    
    stronger brand recognition and marketing resources; and
    
    larger distribution and sales networks.
  Quality problems with our processes, goods and services could harm our reputation for producing
high quality products and erode our competitive advantage.
  If we do not maintain or grow revenues from our support services or consumables, our operating and
financial results may be negatively impacted.
  Our lack of customer purchase contracts and our limited order backlog make it difficult to predict
sales and plan manufacturing requirements, which can lead to lower revenues, higher expenses and
reduced margins.
  
    
    if we overestimate our requirements we may be obligated to purchase more components or
third-party products than is required;
 20




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
    
    if we underestimate our requirements, our third-party manufacturers and suppliers may
have an inadequate product or product component inventory, which could interrupt
manufacturing of our products and result in delays or cancellations in shipments and loss
of revenues;
    
    we may also experience shortages of product components from time to time, which also
could delay the manufacturing of our products; and
    
    over or under production can lead to higher expense, lower than anticipated revenues,
and reduced margins.
 If market conditions cause us to reduce the selling price of our products, or our market share is
negatively affected by the activities of our competitors, our margins and operating results will
decrease.
  We are dependent upon licensed and purchased technology for some of our products, and we may not be
able to renew these licenses or purchase agreements in the future.
  Our international business is subject to risks that could adversely affect our profitability and
operating results.
  
    
    changes in foreign medical reimbursement programs and policies;
    
    changes in foreign regulatory requirements;
    
    local product preferences and product requirements;
    
    longer-term receivables than are typical in the U.S.;
    
    fluctuations in foreign currency exchange rates;
    
    less protection of intellectual property in some countries outside of the U.S.;
    
    trade protection measures and import and export licensing requirements;
    
    work force instability;
    
    political and economic instability; and
    
    complex tax and cash management issues.
 If we are unable to retain our executive officers and hire and retain other key personnel, we may
not be able to sustain or grow our business.
  21




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Warranty and product liability claims could adversely impact our earnings and reputation.
  Failure to adequately protect our intellectual property rights may cause our expenses to increase
and our business to suffer.
   Adverse outcomes in our patent or other litigation could result in monetary payments and royalties,
decreased sales of our products and loss of proprietary rights.
   22




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Our technology may become obsolete, which would negatively impact our ability to sell our products.
  Our reliance on a principal manufacturing facility may impair our ability to respond to natural
disasters or other unforeseen catastrophic events.
  We may make future acquisitions, which involve numerous risks that could impact our business and
results of operations.
  
    
    difficulties in integrating the operations, technologies, and products of the acquired companies;
    
    the risk of diverting managements attention from normal daily operations of the business;
    
    potential difficulties in completing projects associated with in-process research and development;
    
    risks of entering markets in which we have no or limited direct prior experience and
where competitors in such markets have stronger market positions;
    
    initial dependence on unfamiliar supply chains or relatively small supply partners;
    
    insufficient revenues to offset increased expenses associated with acquisitions;
    
    the risk that acquired lines of business may reduce or replace the sales of existing products; and
    
    the potential loss of key employees of the acquired companies.
  We may need additional capital to continue our acquisition growth strategy.
  Our research and development efforts rely upon acquisitions, investments and alliances, and we
cannot guarantee that any previous or future acquisitions, investments or alliances will be
successful.
 23




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Charges to earnings resulting from the application of the purchase method of accounting may
adversely affect the market value of our common stock.
  Future issuances of our common stock could dilute existing stockholders and cause our stock price
to decline.
  Our charter documents and Delaware law contain provisions that could make it more difficult for a
third party to acquire us.
  Utilization of our deferred tax assets may be limited and is dependent on future taxable income.
   24




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Our future financial results could be adversely impacted by asset impairments.
  
 Item 1B. Unresolved Staff Comments
  
 Item 2. Properties
    
 Item 3. Legal Proceedings
  25




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Item 4. Submission of Matters to a Vote of Security Holders
 
 For
    
    WithheldJeffrey F. ODonnell, Sr.
    
    
    20,844,846
    
    
    
    203,245
  26




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PART II
 
 Item 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
   Stock PriceHigh
    
    LowFiscal 2006First Quarter
    
    $
    11.20
    
    
    $
    8.98Second Quarter
    
    
    10.08
    
    
    
    7.55Third Quarter
    
    
    8.59
    
    
    
    6.71Fourth Quarter
    
    
    8.84
    
    
    
    7.19Fiscal 2005First Quarter
    
    
    14.45
    
    
    
    10.07Second Quarter
    
    
    11.02
    
    
    
    9.00Third Quarter
    
    
    13.28
    
    
    
    9.91Fourth Quarter
    
    
    10.75
    
    
    
    8.00
  27




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Item 6. Selected Financial Data
  Year Ended December 31,2006
    
    
    2005
    
    
    2004
    
    
    2003
    
    
    2002(in thousands, except share and per share data)Consolidated Statement of Operations Data (1):Revenues
    
    $
    155,429
    
    
    $
    106,650
    
    
    $
    89,603
    
    
    $
    84,396
    
    
    $
    46,496Cost of revenues
    
    
    82,195
    
    
    
    59,794
    
    
    
    50,302
    
    
    
    51,131
    
    
    
    27,883Gross profit
    
    
    73,234
    
    
    
    46,856
    
    
    
    39,301
    
    
    
    33,265
    
    
    
    18,613Operating Expenses:Research and development
    
    
    11,733
    
    
    
    9,353
    
    
    
    7,397
    
    
    
    8,086
    
    
    
    5,126Write-off acquired in-process research and
development
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,290
    
    
    
    Sales and marketing
    
    
    39,960
    
    
    
    24,957
    
    
    
    18,378
    
    
    
    17,669
    
    
    
    9,974General and administrative
    
    
    22,927
    
    
    
    15,126
    
    
    
    8,348
    
    
    
    7,743
    
    
    
    5,384Total operating expenses
    
    
    74,620
    
    
    
    49,436
    
    
    
    34,123
    
    
    
    34,788
    
    
    
    20,484Operating income (loss)
    
    
    (1,386
    )
    
    
    (2,580
    )
    
    
    5,178
    
    
    
    (1,523
    )
    
    
    (1,871
    )Other Income (Expense):Interest income (expense), net
    
    
    (16
    )
    
    
    325
    
    
    
    (70
    )
    
    
    (212
    )
    
    
    330Other income (expense), net
    
    
    782
    
    
    
    (487
    )
    
    
    1,031
    
    
    
    (11
    )
    
    
    (6
    )Total other income (expense)
    
    
    766
    
    
    
    (162
    )
    
    
    961
    
    
    
    (223
    )
    
    
    324Income
(loss) before income tax benefit (expense)
and minority interest
    
    
    (620
    )
    
    
    (2,742
    )
    
    
    6,139
    
    
    
    (1,746
    )
    
    
    (1,547
    )Income tax benefit (expense)
    
    
    615
    
    
    
    1,473
    
    
    
    8,890
    
    
    
    (62
    )
    
    
    192Income (loss) before minority interest
    
    
    (5
    )
    
    
    (1,269
    )
    
    
    15,029
    
    
    
    (1,808
    )
    
    
    (1,355
    )Minority
interest
    
    
    54
    
    
    
    31
    
    
    
    39
    
    
    
    25
    
    
    
    Net income (loss)
    
    $
    49
    
    
    $
    (1,238
    )
    
    $
    15,068
    
    
    $
    (1,783
    )
    
    $
    (1,355
    )Basic income (loss) per share (2)
    
    $
    0.00
    
    
    $
    (0.08
    )
    
    $
    1.47
    
    
    $
    (0.19
    )
    
    $
    (0.22
    )Diluted income (loss) per share (2)
    
    $
    0.00
    
    
    $
    (0.08
    )
    
    $
    1.39
    
    
    $
    (0.19
    )
    
    $
    (0.22
    )Shares used in computing basic income (loss)
per share (2)
    
    
    22,502,040
    
    
    
    14,695,261
    
    
    
    10,236,838
    
    
    
    9,376,205
    
    
    
    6,088,081Shares used in computing diluted income (loss)
per 
share (2)
    
    
    22,555,326
    
    
    
    14,695,261
    
    
    
    10,814,680
    
    
    
    9,376,205
    
    
    
    6,088,081Consolidated Statement of Cash Flows Data:Cash flows provided by (used in) operating
activities
    
    $
    8,683
    
    
    $
    (850
    )
    
    $
    6,259
    
    
    $
    173
    
    
    $
    (1,369
    )Cash flows used in investing activities
    
    $
    (3,307
    )
    
    $
    (18,053
    )
    
    $
    (41
    )
    
    $
    (19,597
    )
    
    $
    (3,369
    )Cash flows provided by financing activities
    
    $
    897
    
    
    $
    547
    
    
    $
    15,499
    
    
    $
    227
    
    
    $
    23,902
 28




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Year Ended December 31,2006
    
    2005
    
    2004
    
    2003
    
    2002(in thousands)Consolidated Balance Sheet Data:Cash and cash equivalents
    
    $
    9,819
    
    
    $
    3,546
    
    
    $
    21,902
    
    
    $
    185
    
    
    $
    19,382Total assets
    
    
    247,645
    
    
    
    248,557
    
    
    
    77,175
    
    
    
    48,317
    
    
    
    42,050Current liabilities
    
    
    31,294
    
    
    
    33,832
    
    
    
    18,682
    
    
    
    20,807
    
    
    
    14,378Long-term liabilities
    
    
    679
    
    
    
    1,806
    
    
    
    
    
    
    
    1,180
    
    
    
    363Total shareholders equity
    
    
    215,597
    
    
    
    212,791
    
    
    
    58,334
    
    
    
    26,132
    
    
    
    27,309
 
 (1)
    
    The acquisition of Burdick, Inc. in January 2003 and the business combination of Quinton and
CSI in September 2005 materially affect the comparability of information contained in this
table (See Item 8, Note 2 to the Consolidated Financial Statements).(2)
    
    Shares prior to September 1, 2005 have been retroactively adjusted to reflect the conversion
of Quinton shares into Cardiac Science Corporation shares at a ratio of 0.77184895 Cardiac
Science Corporation shares for each Quinton share. See Item 8, Note 1 to the Consolidated
Financial Statements for a reconciliation of the denominators used in computing basic and
diluted loss per share for 2006, 2005 and 2004. 29




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Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
 You should read the following discussion and analysis in conjunction with our consolidated
financial statements and related notes included elsewhere in this report. Except for historical
information, the following discussion contains forward-looking statements for purposes of the safe
harbor provisions under the Private Securities Litigation Reform Act of 1995. All statements other
than statements of historical fact, including future results of operations or financial position,
made in this Annual Report on Form 10-K are forward looking. The words believe, expect,
intend, anticipate, will, may, variations of such words, and similar expressions identify
forward-looking statements, but their absence does not mean that the statement is not
forward-looking. These forward-looking statements reflect managements current expectations and
involve risks and uncertainties. Our actual results could differ materially from results that may
be anticipated by such forward-looking statements. The principal factors that could cause or
contribute to such differences include, but are not limited to, those discussed in the section
entitled Risk Factors and those discussed elsewhere in this report. Readers are cautioned not to
place undue reliance on these forward-looking statements, which speak only as of the date of this
report. We undertake no obligation to revise any forward-looking statements to reflect events or
circumstances that may subsequently arise. Readers are urged to review and consider carefully the
various disclosures made in this report and in our other filings made with the SEC that attempt to
advise interested parties of the risks and factors that may affect our business, prospects and
results of operations. The terms the Company, us, we and our refer to Cardiac Science
Corporation and our majority-owned subsidiaries.
 Business Overview
     Critical Accounting Estimates and Policies
  30




---



##### Table of Contents



Critical Accounting Estimates
 and
 Stock-based Compensation.
 Purchase Price Allocations.
  Accounts Receivable.
 Inventories.
 Goodwill.
  31




---



##### Table of Contents



Intangible Assets.
   Valuation of Long-Lived Assets.
 Warranty.
 Deferred Tax Assets and Income Taxes
 32




---



##### Table of Contents



Litigation and Other Contingencies.
 Restructuring Costs.
 Software Revenue Recognition.
 Sales Returns.
 Critical Accounting Policies
 Revenue Recognition.
    33




---



##### Table of Contents



Accounting for Stock-Based Compensation.
  Prior Year Misstatements.
 Results of Operations
 Overview of 2006 Results
  
    
    We generated solid revenue growth in our AED products and significant cash flow company
wide.
 34




---



##### Table of Contents




    
    We successfully completed substantially all integration activities on schedule and as
planned for a significant merger between Quinton and CSI.
    
    We laid the groundwork for future growth by consolidating all of our administrative and
customer service functions in Washington State and consolidating substantially all of our
U.S. manufacturing into a single location in Wisconsin.
    
    We released updates to our product lines in a number of key areas, including a
web-enabled version of our Pyramis cardiology management system and AEDs with enhanced CPR
prompting features.
    
    We obtained approval from the Japanese Ministry of Health for a biphasic private-labeled
version of our Powerheart G-3 and, consequently, were able to regain sales momentum for our
AED products in Japan.
 Looking Forward
    Revenues
  35




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##### Table of Contents



Year Ended
    
    
    
    
    
    
    Year Ended
    
    
    
    
    
    
    Year EndedDecember 31,
    
    
    % Change
    
    
    December 31,
    
    
    % Change
    
    
    December 31,(dollars in thousands)
    
    2006
    
    
    2005 to 2006
    
    
    2005
    
    
    2004 to 2005
    
    
    2004Cardiac monitoring products
    
    $
    71,016
    
    
    
    (4.4
    %)
    
    $
    74,278
    
    
    
    (4.0
    %)
    
    $
    77,373% of revenue
    
    
    45.7
    %
    
    
    
    
    
    
    69.6
    %
    
    
    
    
    
    
    86.4
    %Defibrillation products
    
    
    67,414
    
    
    
    251.4
    %
    
    
    19,182
    
    
    
    100.0
    %
    
    
    % of revenue
    
    
    43.4
    %
    
    
    
    
    
    
    18.0
    %
    
    
    
    
    
    
    Service
    
    
    16,999
    
    
    
    28.9
    %
    
    
    13,190
    
    
    
    7.8
    %
    
    
    12,230% of revenue
    
    
    10.9
    %
    
    
    
    
    
    
    12.4
    %
    
    
    
    
    
    
    13.6
    %Total revenues
    
    $
    155,429
    
    
    
    45.7
    %
    
    $
    106,650
    
    
    
    19.0
    %
    
    $
    89,603
 Year Ended December 31, 2006 Compared to Year Ended December 31, 2005
    Year Ended December 31, 2005 Compared to Year Ended December 31, 2004
    Gross Profit
  36




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##### Table of Contents



Year ended
    
    
    
    
    
    
    Year ended
    
    
    
    
    
    
    Year endedDecember 31,
    
    
    % Change
    
    
    December 31,
    
    
    % Change
    
    
    December 31,(dollars in thousands)
    
    2006
    
    
    2005 to 2006
    
    
    2005
    
    
    2004 to 2005
    
    
    2004Products
    
    $
    68,573
    
    
    
    62.2
    %
    
    $
    42,265
    
    
    
    22.5
    %
    
    $
    34,511% of products revenue
    
    
    49.5
    %
    
    
    
    
    
    
    45.2
    %
    
    
    
    
    
    
    44.6
    %Service
    
    
    4,661
    
    
    
    1.5
    %
    
    
    4,591
    
    
    
    (4.2
    %)
    
    
    4,790% of service revenue
    
    
    27.4
    %
    
    
    
    
    
    
    34.8
    %
    
    
    
    
    
    
    39.2
    %Total gross profit
    
    $
    73,234
    
    
    
    56.3
    %
    
    $
    46,856
    
    
    
    19.2
    %
    
    $
    39,301% of total revenue
    
    
    47.1
    %
    
    
    
    
    
    
    43.9
    %
    
    
    
    
    
    
    43.9
    %
 Year Ended December 31, 2006 Compared to Year Ended December 31, 2005
   Year Ended December 31, 2005 Compared to Year Ended December 31, 2004
    Operating Expenses
   37




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##### Table of Contents



Year Ended
    
    
    
    
    
    
    Year Ended
    
    
    
    
    
    
    Year EndedDecember 31,
    
    
    % Change
    
    
    December 31,
    
    
    % Change
    
    
    December 31,(dollars in thousands)
    
    2006
    
    
    2005 to 2006
    
    
    2005
    
    
    2004 to 2005
    
    
    2004Research and development (including
stock-based compensation expense of
$321, $0 and $0)
    
    $
    11,733
    
    
    
    25.4
    %
    
    $
    9,353
    
    
    
    26.4
    %
    
    $
    7,397% of total revenue
    
    
    7.5
    %
    
    
    
    
    
    
    8.8
    %
    
    
    
    
    
    
    8.3
    %Sales (including stock-based
compensation expense of $471, $0
and $0)
    
    
    32,888
    
    
    
    53.4
    %
    
    
    21,438
    
    
    
    34.4
    %
    
    
    15,945% of total revenue
    
    
    21.2
    %
    
    
    
    
    
    
    20.1
    %
    
    
    
    
    
    
    17.8
    %Marketing (including stock-based
compensation expense of $252, $0
and $0)
    
    
    7,072
    
    
    
    101.0
    %
    
    
    3,519
    
    
    
    44.6
    %
    
    
    2,433% of total revenue
    
    
    4.5
    %
    
    
    
    
    
    
    3.3
    %
    
    
    
    
    
    
    2.7
    %General and administrative
(including stock-based compensation
expense of $650, $58 and $73)
    
    
    22,927
    
    
    
    51.6
    %
    
    
    15,126
    
    
    
    81.2
    %
    
    
    8,348% of total revenue
    
    
    14.8
    %
    
    
    
    
    
    
    14.2
    %
    
    
    
    
    
    
    9.3
    %Total operating expenses
    
    $
    74,620
    
    
    
    50.9
    %
    
    $
    49,436
    
    
    
    44.9
    %
    
    $
    34,123% of total revenue
    
    
    48.0
    %
    
    
    
    
    
    
    46.4
    %
    
    
    
    
    
    
    38.1
    %
 Year Ended December 31, 2006 Compared to Year Ended December 31, 2005
     38




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Year Ended December 31, 2005 Compared to Year Ended December 31, 2004
     Other Income and Expense
  Income Taxes
   39




---



##### Table of Contents



Liquidity and Capital Resources
  Year Ended
    
    
    
    
    
    
    Year Ended
    
    
    
    
    
    
    Year EndedDecember 31,
    
    
    % Change
    
    
    December 31,
    
    
    % Change
    
    
    December 31,(dollars in thousands)
    
    2006
    
    
    2005 to 2006
    
    
    2005
    
    
    2004 to 2005
    
    
    2004Cash flow provided by (used in) operating activities
    
    $
    8,683
    
    
    
    1121.5
    %
    
    $
    (850
    )
    
    
    (113.6
    %)
    
    $
    6,259Cash flow used in investing activities
    
    
    (3,307
    )
    
    
    (81.7
    %)
    
    
    (18,053
    )
    
    
    n/m
    
    
    
    (41
    )Cash flow provided by financing activities
    
    
    897
    
    
    
    64.0
    %
    
    
    547
    
    
    
    (96.5
    %)
    
    
    15,499Total change in cash
    
    $
    6,273
    
    
    
    134.2
    %
    
    $
    (18,356
    )
    
    
    184.5
    %
    
    $
    21,717
       Contractual Obligations
   Less than
    
    
    1-3
    
    
    3-5
    
    
    AfterContractual Obligations
    
    Total
    
    
    1 year
    
    
    years
    
    
    years
    
    
    5 yearsOperating leases
    
    $
    9,464
    
    
    $
    2,855
    
    
    $
    3,303
    
    
    $
    1,494
    
    
    $
    1,812Purchase obligations
    
    
    31,165
    
    
    
    31,165
    
    
    
    
    
    
    
    
    
    
    
    Total contractual
obligations
    
    $
    40,629
    
    
    $
    34,020
    
    
    $
    3,303
    
    
    $
    1,494
    
    
    $
    1,812
 40




---



##### Table of Contents



Less than
    
    
    1-3
    
    
    3-5
    
    
    AfterOther Commercial Commitments
    
    Total
    
    
    1 year
    
    
    years
    
    
    years
    
    
    5 yearsLine of credit
    
    $
    94
    
    
    $
    94
    
    
    $
    
    
    
    $
    
    
    
    $
    
   
 Item 7A. Quantitative and Qualitative Disclosures About Market Risk
  41




---



##### Table of Contents



Item 8. Financial Statements and Supplementary Data
 CARDIAC SCIENCE CORPORATION
AND SUBSIDIARIES
 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 Managements Report on Internal Control Over Financial ReportingReport of Independent Registered Public Accounting FirmReport of Independent Registered Public Accounting FirmConsolidated Balance SheetsConsolidated Statements of OperationsConsolidated Statements of Changes in Shareholders Equity and Comprehensive Income (Loss)Consolidated Statements of Cash FlowsNotes to Consolidated Financial StatementsSchedule II  Valuation and Qualifying Accounts
 42




---



##### Table of Contents



MANAGEMENTS REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
 Internal Control  Integrated
Framework
  43




---



##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 Managements Report on
Internal Control over Financial Reporting Internal ControlIntegrated Framework
    Internal ControlIntegrated Framework Internal ControlIntegrated
Framework
   
 44




---



##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
     Internal ControlIntegrated Framework
  
 45




---



##### Table of Contents



CARDIAC SCIENCE CORPORATION AND SUBSIDIARIES
 
 CONSOLIDATED BALANCE SHEETS
 December 31,(In thousands)
    
    2006
    
    
    2005ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    9,819
    
    
    $
    3,546Short-term investments
    
    
    547
    
    
    
    Accounts receivable, net of allowance for doubtful accounts of $907 and
$3,455, respectively
    
    
    26,971
    
    
    
    25,738Inventories
    
    
    17,617
    
    
    
    22,052Deferred income taxes, net
    
    
    3,902
    
    
    
    12,115Prepaid expenses and other current assets
    
    
    2,121
    
    
    
    2,511Total current assets
    
    
    60,977
    
    
    
    65,962Other assets
    
    
    209
    
    
    
    100Machinery and equipment, net of accumulated depreciation and amortization of
$10,245 and $7,565, respectively
    
    
    5,956
    
    
    
    7,631Deferred income taxes, net
    
    
    40,525
    
    
    
    27,849Intangible assets, net of accumulated amortization of $6,111 and $2,642,
respectively
    
    
    31,869
    
    
    
    35,338Investment in unconsolidated entities
    
    
    496
    
    
    
    462Goodwill
    
    
    107,613
    
    
    
    111,215Total assets
    
    $
    247,645
    
    
    $
    248,557LIABILITIES AND SHAREHOLDERS EQUITYCurrent Liabilities:Accounts payable
    
    $
    11,761
    
    
    $
    11,642Accrued liabilities
    
    
    9,890
    
    
    
    11,918Warranty liability
    
    
    2,532
    
    
    
    2,348Deferred revenue
    
    
    7,111
    
    
    
    7,924Total current liabilities
    
    
    31,294
    
    
    
    33,832Other liabilities
    
    
    679
    
    
    
    1,806Total liabilities
    
    
    31,973
    
    
    
    35,638Minority interest
    
    
    75
    
    
    
    128Commitments and contingenciesShareholders Equity:Preferred stock (10,000,000 shares authorized), $0.001 par value, no shares
issued or outstanding as of December 31, 2006 and 2005, respectively
    
    
    
    
    
    
    Common stock (65,000,000 shares authorized), $0.001 par value, 22,598,014
and 22,410,344 shares issued and outstanding at December 31, 2006 and
2005, respectively
    
    
    221,213
    
    
    
    218,335Accumulated other comprehensive income
    
    
    20
    
    
    
    5Accumulated deficit
    
    
    (5,636
    )
    
    
    (5,549
    )Total shareholders equity
    
    
    215,597
    
    
    
    212,791Total liabilities and shareholders equity
    
    $
    247,645
    
    
    $
    248,557
  46




---



##### Table of Contents



CARDIAC SCIENCE CORPORATION AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
 Year Ended December 31,(In thousands, except share and per share data)
    
    2006
    
    
    2005
    
    
    2004Revenues:Products
    
    $
    138,430
    
    
    $
    93,460
    
    
    $
    77,373Service
    
    
    16,999
    
    
    
    13,190
    
    
    
    12,230Total revenues
    
    
    155,429
    
    
    
    106,650
    
    
    
    89,603Cost of Revenues:Products
    
    
    69,857
    
    
    
    51,195
    
    
    
    42,862Service
    
    
    12,338
    
    
    
    8,599
    
    
    
    7,440Total cost of revenues
    
    
    82,195
    
    
    
    59,794
    
    
    
    50,302Gross profit
    
    
    73,234
    
    
    
    46,856
    
    
    
    39,301Operating Expenses:Research and development
    
    
    11,733
    
    
    
    9,353
    
    
    
    7,397Sales
    
    
    32,888
    
    
    
    21,438
    
    
    
    15,945Marketing
    
    
    7,072
    
    
    
    3,519
    
    
    
    2,433General and administrative
    
    
    22,927
    
    
    
    15,126
    
    
    
    8,348Total operating expenses
    
    
    74,620
    
    
    
    49,436
    
    
    
    34,123Operating income (loss)
    
    
    (1,386
    )
    
    
    (2,580
    )
    
    
    5,178Other Income (Expense):Interest income
    
    
    242
    
    
    
    455
    
    
    
    162Interest expense
    
    
    (258
    )
    
    
    (130
    )
    
    
    (232
    )Other income (expense), net
    
    
    782
    
    
    
    (487
    )
    
    
    1,031Total other income (expense)
    
    
    766
    
    
    
    (162
    )
    
    
    961Income
(loss) before income tax benefit and minority
interest
    
    
    (620
    )
    
    
    (2,742
    )
    
    
    6,139Income tax benefit
    
    
    615
    
    
    
    1,473
    
    
    
    8,890Income (loss) before minority interest
    
    
    (5
    )
    
    
    (1,269
    )
    
    
    15,029Minority interest
    
    
    54
    
    
    
    31
    
    
    
    39Net income (loss)
    
    $
    49
    
    
    $
    (1,238
    )
    
    $
    15,068Net income (loss) per share  basic
    
    $
    0.00
    
    
    $
    (0.08
    )
    
    $
    1.47Net income (loss) per share  diluted
    
    $
    0.00
    
    
    $
    (0.08
    )
    
    $
    1.39Weighted average shares outstanding  basic
    
    
    22,502,040
    
    
    
    14,695,261
    
    
    
    10,236,838Weighted average shares outstanding  diluted
    
    
    22,555,326
    
    
    
    14,695,261
    
    
    
    10,814,680
  47




---



##### Table of Contents



CARDIAC SCIENCE CORPORATION AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY AND COMPREHENSIVE INCOME (LOSS)
 AccumulatedDeferred
    
    
    OtherCommon Stock
    
    
    Stock-based
    
    
    Comprehensive
    
    
    Accumulated(in thousands, except share amounts)
    
    Amount
    
    
    Shares
    
    
    Compensation
    
    
    Income
    
    
    Deficit
    
    
    TotalBalance, December 31, 2003
    
    $
    45,617
    
    
    
    9,428,061
    
    
    $
    (106
    )
    
    $
    
    
    
    $
    (19,379
    )
    
    $
    26,132Issuance of common stock upon
exercise of stock options
    
    
    359
    
    
    
    121,422
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    359Amortization of deferred stock compensation
    
    
    
    
    
    
    
    
    
    
    73
    
    
    
    
    
    
    
    
    
    
    
    73Proceeds from issuance of common
stock, net of issuance costs
    
    
    15,451
    
    
    
    1,239,571
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15,451Proceeds from issuance of stock under
employee stock purchase plan
    
    
    531
    
    
    
    60,977
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    531Tax benefit recognized for stock options
    
    
    698
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    698Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15,068
    
    
    
    15,068Unrealized gain on available-for-sale securities,
net of income tax effect of $14
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    22
    
    
    
    
    
    
    
    22Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15,090Balance, December 31, 2004
    
    
    62,656
    
    
    
    10,850,031
    
    
    
    (33
    )
    
    
    22
    
    
    
    (4,311
    )
    
    
    58,334Issuance of common stock in connection with
the merger of CSI, net of issuance costs
    
    
    154,885
    
    
    
    11,467,753
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    154,885Issuance of common stock upon
exercise of stock options
    
    
    181
    
    
    
    33,146
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    181Amortization of deferred stock compensation
    
    
    
    
    
    
    
    
    
    
    33
    
    
    
    
    
    
    
    
    
    
    
    33Proceeds from issuance of stock under
employee stock purchase plan
    
    
    538
    
    
    
    59,387
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    538Stock awards
    
    
    25
    
    
    
    463
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    25Tax benefit recognized for stock options
    
    
    50
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    50Fractional shares refunded in stock split
    
    
    
    
    
    
    (436
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Comprehensive income:Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,238
    )
    
    
    (1,238
    )Unrealized loss on available-for-sale securities,
net of income tax effect of $8
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (13
    )
    
    
    
    
    
    
    (13
    )Reclassification adjustment for gain
recognized in net income, net of
income tax effect of $6
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (9
    )
    
    
    
    
    
    
    (9
    )Foreign
currency translation adjustments, net of income tax effect of $2
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5
    
    
    
    
    
    
    
    5Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,255
    )Balance, December 31, 2005
    
    
    218,335
    
    
    
    22,410,344
    
    
    
    
    
    
    
    5
    
    
    
    (5,549
    )
    
    
    212,791Cumulative effect of adjustment resulting from
the adoption of SAB No. 108, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (136
    )
    
    
    (136
    )Issuance of common stock upon
exercise of stock options
    
    
    232
    
    
    
    79,012
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    232Stock-based
compensation, net
    
    
    1,981
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,981Proceeds
from issuance of stock under
employee stock purchase plan
    
    
    665
    
    
    
    92,199
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    665Stock awards
    
    
    
    
    
    
    16,459
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    49
    
    
    
    49Unrealized gain on available-for-sale securities,
net of income tax effect of $12
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    20
    
    
    
    
    
    
    
    20Foreign
currency translation adjustments, net of income tax effect of $2
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5
    )
    
    
    
    
    
    
    (5
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    64Balance, December 31, 2006
    
    $
    221,213
    
    
    
    22,598,014
    
    
    $
    
    
    
    $
    20
    
    
    $
    (5,636
    )
    
    $
    215,597
  48




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##### Table of Contents



CARDIAC SCIENCE CORPORATION AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 Year Ended December 31,(In thousands)
    
    2006
    
    
    2005
    
    
    2004Operating Activities:Net income (loss)
    
    $
    49
    
    
    $
    (1,238
    )
    
    $
    15,068Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:Depreciation and amortization
    
    
    6,261
    
    
    
    3,212
    
    
    
    1,574Deferred income taxes
    
    
    (781
    )
    
    
    (1,565
    )
    
    
    (9,014
    )Stock-based compensation
    
    
    2,028
    
    
    
    58
    
    
    
    73Minority interest
    
    
    (54
    )
    
    
    (31
    )
    
    
    (39
    )Gain on sale of marketable equity securities
    
    
    
    
    
    
    (15
    )
    
    
    (610
    )Loss on disposal of machinery and equipment
    
    
    58
    
    
    
    6
    
    
    
    20Gain on sale of hemodynamic monitoring business
    
    
    
    
    
    
    
    
    
    
    (633
    )Loss on disposal of technology
    
    
    
    
    
    
    270
    
    
    
    Loss in value of investment in unconsolidated entity
    
    
    
    
    
    
    916
    
    
    
    Changes in operating assets and liabilities, net of
business acquired:Accounts
receivable, net
    
    
    (1,189
    )
    
    
    (5,034
    )
    
    
    (1,169
    )Inventories
    
    
    2,956
    
    
    
    2,334
    
    
    
    775Prepaid expenses and other assets
    
    
    1,189
    
    
    
    (118
    )
    
    
    (51
    )Accounts payable
    
    
    330
    
    
    
    (2,742
    )
    
    
    (568
    )Accrued liabilities
    
    
    (1,604
    )
    
    
    1,055
    
    
    
    332Warranty liability
    
    
    (95
    )
    
    
    (208
    )
    
    
    49Deferred revenue
    
    
    (465
    )
    
    
    2,250
    
    
    
    452Net cash flows provided by (used in) operating activities
    
    
    8,683
    
    
    
    (850
    )
    
    
    6,259Investing Activities:Purchases of short-term investments
    
    
    (839
    )
    
    
    
    
    
    
    Maturities of short-term investments
    
    
    292
    
    
    
    
    
    
    
    Purchases of machinery and equipment
    
    
    (1,249
    )
    
    
    (1,187
    )
    
    
    (666
    )Payments related to the purchase of Cardiac Science, Inc.
    
    
    (1,749
    )
    
    
    (17,491
    )
    
    
    Proceeds from sales of marketable equity securities
    
    
    
    
    
    
    625
    
    
    
    Purchase of technology
    
    
    
    
    
    
    
    
    
    
    (125
    )Proceeds from collection of notes
    
    
    238
    
    
    
    
    
    
    
    750Net cash flows used in investing activities
    
    
    (3,307
    )
    
    
    (18,053
    )
    
    
    (41
    )Financing Activities:Repayments on bank line of credit, net
    
    
    
    
    
    
    
    
    
    
    (354
    )Proceeds from issuance of stock, net of issuance costs
    
    
    
    
    
    
    (172
    )
    
    
    15,451Payments of long-term debt
    
    
    
    
    
    
    
    
    
    
    (363
    )Payment of note payable in connection with purchase of technology
    
    
    
    
    
    
    
    
    
    
    (125
    )Proceeds from exercise of stock options and issuance ofshares under employee purchase plan
    
    
    897
    
    
    
    719
    
    
    
    890Net cash flows provided by financing activities
    
    
    897
    
    
    
    547
    
    
    
    15,499Net change in cash and cash equivalents
    
    
    6,273
    
    
    
    (18,356
    )
    
    
    21,717Cash and cash equivalents, beginning of period
    
    
    3,546
    
    
    
    21,902
    
    
    
    185Cash and cash equivalents, end of period
    
    $
    9,819
    
    
    $
    3,546
    
    
    $
    21,902Supplemental disclosures of cash flow information:Cash paid for income taxes
    
    $
    204
    
    
    $
    251
    
    
    $
    150Cash paid for interest
    
    
    54
    
    
    
    34
    
    
    
    117Supplemental disclosures of noncash investing and financing activities:Note issued in connection with purchase of technology
    
    $
    
    
    
    $
    
    
    
    $
    125Shares issued in connection with purchase of Cardiac Science, Inc.
    
    
    
    
    
    
    155,057
    
    
    
    
  49




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##### Table of Contents



CARDIAC SCIENCE CORPORATION. AND SUBSIDIARIES
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 1. Summary of Significant Accounting Policies
 Organization and Description of Business
     Basis of Presentation
   Use of Estimates
  50




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##### Table of Contents



CARDIAC SCIENCE CORPORATION. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  Cash Equivalents
  Short-term Investments
   Accounts Receivable
  Inventories
  Machinery and Equipment
  Intangible Assets
  51




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##### Table of Contents



CARDIAC SCIENCE CORPORATION. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
   Goodwill
   Valuation of Long-Lived Assets
  52




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##### Table of Contents



CARDIAC SCIENCE CORPORATION. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 Purchase Price Allocations
  Deferred Tax Assets and Income Taxes
  Litigation and Other Contingencies
  Restructuring Costs
  Revenue Recognition
    53




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##### Table of Contents



CARDIAC SCIENCE CORPORATION. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
         54




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##### Table of Contents



CARDIAC SCIENCE CORPORATION. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 Sales Returns
  Segment Reporting
  Export Sales
  Foreign Currency Translation
   Advertising Costs
  Warranty
   Research and Development Costs
  Comprehensive Income
  55




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##### Table of Contents



CARDIAC SCIENCE CORPORATION. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
    Year ended December 31,2006
    
    2005Unrealized gain
on securities
    
    $
    20
    
    $
    Foreign
currency translation adjustments
    
    
    
    
    
    5Total
accumulated other comprehensive income
    
    $
    20
    
    $
    5
 Financial Instruments and Concentrations of Credit Risk
   Stock-Based Compensation
    Net Income (Loss) Per Share
  56




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##### Table of Contents



CARDIAC SCIENCE CORPORATION. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 Year ended December 31,(in thousands, except share data)
    
    2006
    
    
    2005
    
    
    2004Numerator:Net income (loss)
    
    $
    49
    
    
    $
    (1,238
    )
    
    $
    15,068Denominator:Weighted average shares for basic calculation
    
    
    22,502,040
    
    
    
    14,695,261
    
    
    
    10,236,838Incremental
shares from employee stock options and ESPP
    
    
    53,286
    
    
    
    
    
    
    
    577,842Weighted average shares for diluted calculation
    
    
    22,555,326
    
    
    
    14,695,261
    
    
    
    10,814,680
  Year ended December 31,2006
    
    
    2005
    
    
    2004Antidilutive shares issuable upon exercise of stock options
    
    
    2,296,587
    
    
    
    3,339,624
    
    
    
    175,253Antidilutive shares issuable upon exercise of warrants
    
    
    330,834
    
    
    
    330,909
    
    
    
    Total
    
    
    2,627,421
    
    
    
    3,670,533
    
    
    
    175,253
 Customer and Vendor Concentrations
  Year ended December 31,Customer
    
    2006
    
    2005
    
    2004Customer 1
    
    
    10.7
    %
    
    
    *
    
    
    
    *Customer 2
    
    
    *
    
    
    
    13.2
    %
    
    
    15.3
    %
 
 *
    
    Did not exceed 10%.  Year ended December 31,Vendor
    
    2006
    
    2005
    
    2004Vendor 1
    
    
    11.9
    %
    
    
    *
    
    
    
    *Vendor 2
    
    
    10.1
    %
    
    
    17.5
    %
    
    
    18.3
    %
 
 *
    
    Did not exceed 10%.  Taxes Collected from Customers and Remitted to Governmental Authorities
  Reclassifications
  57




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##### Table of Contents



CARDIAC SCIENCE CORPORATION. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 Recent Accounting Pronouncements
     2. Acquisitions
 Merger Transaction with Cardiac Science, Inc.
   58




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##### Table of Contents



CARDIAC SCIENCE CORPORATION. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  
    
    11,467,753 shares of common stock valued at approximately $146,911,000 issued to CSI
stockholders and senior note holders. The fair value of common stock issued is based on a
per share value of $12.81, which is equal to Quintons average closing price per share as
reported on The Nasdaq National Market for a five trading day period (two days before and
after February 28, 2005), the announcement date of the merger transaction, adjusted by the
Quinton exchange ratio.
    
    Cash payment of $20,000,000 to the CSI senior note holders.
    
    1,229,881 vested options to purchase shares of common stock issued to CSI option
holders, valued at $7,402,000 calculated using the Black-Scholes option-pricing model.
    
    330,909 exercisable warrants to purchase shares of common stock issued to certain CSI
warrant holders, valued at $1,320,000 calculated using the Black-Scholes option-pricing
model.
    
    $3,198,000 in accrued liabilities related to estimated exit and severance costs.
    
    $2,244,000 in estimated transaction related costs of Quinton.
  (in thousands)Cash
    
    $
    20,000Shares
    
    
    146,911Options
    
    
    7,402Warrants
    
    
    1,320Accrued liabilities
    
    
    3,198Transaction costs
    
    
    2,244Total
    
    $
    181,075
  59




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##### Table of Contents



CARDIAC SCIENCE CORPORATION. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  (in thousands)Cash and cash equivalents
    
    $
    6,295Accounts receivable, net of allowance for doubtful accounts
    
    
    7,098Inventories
    
    
    11,826Net deferred tax assets, current
    
    
    3,106Prepaid expenses and other current assets
    
    
    2,548Machinery and equipment
    
    
    3,979Net deferred tax assets, non-current
    
    
    29,725Other long-term assets
    
    
    661Intangible assets
    
    
    31,360Goodwill
    
    
    98,990Total assets acquired
    
    
    195,588Liabilities assumed
    
    
    (14,513
    )Net assets acquired
    
    $
    181,075
  Year ended(In thousands)
    
    December 31, 2006Goodwill, as reported December 31, 2005
    
    $
    102,592Increase in accounts receivable, net of allowance for doubtful accounts
    
    
    (44
    )Decrease in inventories
    
    
    1,513Decrease in net deferred tax assets, current
    
    
    4,593Increase in prepaid expenses and other current assets
    
    
    (1,135
    )Increase in net deferred tax assets, non-current
    
    
    (8,225
    )Decrease in liabilities assumed
    
    
    (304
    )Goodwill, end of period
    
    $
    98,990
     60




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##### Table of Contents



CARDIAC SCIENCE CORPORATION. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
    (unaudited)Year ended December 31,(in thousands, except per share data)
    
    2005
    
    2004Revenues
    
    $
    141,941
    
    
    $
    157,612Net income (loss)
    
    $
    (61,502
    )
    
    $
    3,847Basic net income (loss) per share
    
    $
    (2.75
    )
    
    $
    0.18
   Minority Interest
  3. Segment Reporting
   61




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##### Table of Contents



CARDIAC SCIENCE CORPORATION. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
   Year ended December 31,(in thousands)
    
    2006
    
    
    2005
    
    
    2004Cardiac monitoring products
    
    $
    71,016
    
    
    $
    74,278
    
    
    $
    77,373Defibrillation products
    
    
    67,414
    
    
    
    19,182
    
    
    
    Service
    
    
    16,999
    
    
    
    13,190
    
    
    
    12,230Total
    
    $
    155,429
    
    
    $
    106,650
    
    
    $
    89,603
  Year ended December 31,(in thousands)
    
    2006
    
    
    2005
    
    
    2004Domestic
    
    $
    117,497
    
    
    $
    92,409
    
    
    $
    83,696Foreign
    
    
    37,932
    
    
    
    14,241
    
    
    
    5,907Total
    
    $
    155,429
    
    
    $
    106,650
    
    
    $
    89,603
  4. Restructuring costs
 Restructuring Costs Associated with CSI Merger
      62




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##### Table of Contents



CARDIAC SCIENCE CORPORATION. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  Balance at
    
    
    Accrued as Part
    
    
    
    
    
    
    
    
    
    
    Balance atDecember 31,
    
    
    of the Merger
    
    
    
    
    
    
    Cash
    
    
    December 31,(in thousands)
    
    2004
    
    
    Transaction
    
    
    Additions
    
    
    Expenditures
    
    
    2005Vacated facilities
    
    $
    
    
    
    $
    2,709
    
    
    $
    56
    
    
    $
    (514
    )
    
    $
    2,251Employee severance and retention costs
    
    
    
    
    
    
    1,702
    
    
    
    1,589
    
    
    
    (1,478
    )
    
    
    1,813Total
    
    $
    
    
    
    $
    4,411
    
    
    $
    1,645
    
    
    $
    (1,992
    )
    
    $
    4,064
 Balance at
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balance atDecember 31,
    
    
    
    
    
    
    Cash
    
    
    
    
    
    
    December 31,(in thousands)
    
    2005
    
    
    Additions
    
    
    Expenditures
    
    
    Adjustments
    
    
    2006Vacated facilities
    
    $
    2,251
    
    
    $
    93
    
    
    $
    (808
    )
    
    $
    (152
    )
    
    $
    1,384Employee severance and retention costs
    
    
    1,813
    
    
    
    233
    
    
    
    (1,780
    )
    
    
    
    
    
    
    266Total
    
    $
    4,064
    
    
    $
    326
    
    
    $
    (2,588
    )
    
    $
    (152
    )
    
    $
    1,650
 5. Inventories
  (in thousands)
    
    2006
    
    
    2005Raw materials
    
    $
    13,887
    
    
    $
    18,746Finished goods
    
    
    3,730
    
    
    
    3,306Total inventories
    
    $
    17,617
    
    
    $
    22,052
 6. Machinery and Equipment
  DepreciableLives
    
    2006
    
    
    2005Equipment
    
    (2-14 years)
    
    $
    12,533
    
    
    $
    11,487Furniture and fixtures
    
    (2-13 years)
    
    
    1,950
    
    
    
    2,053Leasehold improvements
    
    (2-7 years)
    
    
    1,718
    
    
    
    1,656Subtotal
    
    
    
    
    16,201
    
    
    
    15,196Less: Accumulated depreciation and amortization
    
    
    
    
    (10,245
    )
    
    
    (7,565
    )Net machinery and equipment
    
    
    
    $
    5,956
    
    
    $
    7,631
  63




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CARDIAC SCIENCE CORPORATION. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 7. Intangible Assets
  AccumulatedUseful life
    
    Cost
    
    
    Amortization
    
    
    NetIntangible assets not subject to amortization:Burdick trade name
    
    
    
    $
    3,400
    
    
    $
    
    
    
    $
    3,400Cardiac Science trade name
    
    
    
    
    11,380
    
    
    
    
    
    
    
    11,380Intangible assets subject to amortization:Cardiac Science customer relationships
    
    5 years
    
    
    8,650
    
    
    
    (2,307
    )
    
    
    6,343Cardiac Science developed technology
    
    8 years
    
    
    11,330
    
    
    
    (1,888
    )
    
    
    9,442Burdick distributor relationships
    
    10 years
    
    
    1,400
    
    
    
    (560
    )
    
    
    840Burdick developed technology
    
    7 years
    
    
    860
    
    
    
    (491
    )
    
    
    369Patents and patent applications
    
    5-10 years
    
    
    960
    
    
    
    (865
    )
    
    
    95Total
    
    
    
    $
    37,980
    
    
    $
    (6,111
    )
    
    $
    31,869
   2007
    
    $
    3,4572008
    
    
    3,4192009
    
    
    3,4192010
    
    
    2,7202011
    
    
    1,566Thereafter
    
    
    2,508
 8. Investment in Unconsolidated Entities
   2006
    
    
    2005ScImage
    
    $
    84
    
    
    $
    84Biotel
    
    
    370
    
    
    
    370Other
    
    
    42
    
    
    
    8Total investment in unconsolidated entities
    
    $
    496
    
    
    $
    462
 ScImage
  64




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##### Table of Contents



CARDIAC SCIENCE CORPORATION. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 Biotel, Inc.
  9. Goodwill
     10. Accrued Liabilities and Warranty
  2006
    
    
    2005Accrued compensation and benefits
    
    $
    5,019
    
    
    $
    5,329Other accrued liabilities
    
    
    4,871
    
    
    
    6,589Total accrued liabilities
    
    $
    9,890
    
    
    $
    11,918
  PurchaseaccountingadjustmentsCharged to
    
    to estimatedBeginning
    
    product cost
    
    fair value of
    
    Warranty
    
    End of(in thousands)
    
    of period
    
    of revenues
    
    acquired warranty
    
    Expenditures
    
    periodYear ended December 31, 2004
    
    $
    2,059
    
    
    $
    1,291
    
    
    $
    
    
    
    $
    (1,257
    )
    
    $
    2,093Year ended December 31, 2005
    
    
    2,093
    
    
    
    1,611
    
    
    
    479
    
    
    
    (1,835
    )
    
    
    2,348Year ended December 31, 2006
    
    
    2,348
    
    
    
    2,042
    
    
    
    279
    
    
    
    (2,137
    )
    
    
    2,532
 11. Credit Facility
  65




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##### Table of Contents



CARDIAC SCIENCE CORPORATION. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  12. Income Taxes
  Year ended December 31,2006
    
    
    2005
    
    
    2004CurrentFederal
    
    $
    
    
    
    $
    
    
    
    $
    77State
    
    
    
    
    
    
    73
    
    
    
    47Foreign
    
    
    166
    
    
    
    19
    
    
    
    Total current provision
    
    
    166
    
    
    
    92
    
    
    
    124DeferredFederal
    
    
    (490
    )
    
    
    (1,388
    )
    
    
    (8,472
    )State
    
    
    (291
    )
    
    
    (177
    )
    
    
    (542
    )Total deferred benefit
    
    
    (781
    )
    
    
    (1,565
    )
    
    
    (9,014
    )Total provision benefit
    
    $
    (615
    )
    
    $
    (1,473
    )
    
    $
    (8,890
    )
  2006
    
    2005
    
    2004Federal
income tax provision (benefit) at U.S. statutory rates
    
    
    (34.0
    %)
    
    
    (34.0
    %)
    
    
    34.0
    %Meals and entertainment
    
    
    23.2
    %
    
    
    3.5
    %
    
    
    1.6
    %Stock-based compensation
    
    
    44.3
    %
    
    
    
    
    
    
    Research and development credits
    
    
    (131.8
    %)
    
    
    (23.4
    %)
    
    
    (6.5
    %)State income taxes, net of federal benefit
    
    
    
    
    
    
    (0.5
    %)
    
    
    0.5
    %Exclusion for extraterritorial income
    
    
    
    
    
    
    
    
    
    
    (0.8
    %)Change in deferred tax valuation allowance
    
    
    
    
    
    
    
    
    
    
    (173.6
    %)Other
    
    
    (0.9
    %)
    
    
    0.7
    %
    
    
    Benefit for income taxes
    
    
    (99.2
    %)
    
    
    (53.7
    %)
    
    
    (144.8
    %)
  66




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CARDIAC SCIENCE CORPORATION. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
    2006
    
    
    2005Deferred tax assets:Net operating loss carryforwards
    
    $
    42,471
    
    
    $
    38,427Stock-based compensation
    
    
    1,516
    
    
    
    1,172Research and experimentation and alternative minimum tax credits
    
    
    5,754
    
    
    
    4,510Inventory basis difference
    
    
    1,197
    
    
    
    1,555Warranty liability
    
    
    936
    
    
    
    889Deferred revenue/ gain/ loss
    
    
    763
    
    
    
    2,096Accrued compensation/ severance/ relocation
    
    
    673
    
    
    
    1,671Other assets
    
    
    3,354
    
    
    
    1,188Other
    
    
    816
    
    
    
    1,531Gross deferred tax assets
    
    
    57,480
    
    
    
    53,039Deferred tax liabilities:Burdick intangible assets
    
    
    (447
    )
    
    
    (559
    )Burdick trade name intangible asset
    
    
    (1,257
    )
    
    
    (1,156
    )Cardiac Science intangible assets
    
    
    (7,063
    )
    
    
    (7,005
    )Cardiac
Science trade name
    
    
    (4,207
    )
    
    
    (4,211
    )Goodwill from treadmill line acquisition
    
    
    (79
    )
    
    
    (62
    )Depreciation/amortization
    
    
    
    
    
    
    (82
    )Gross deferred tax liabilities
    
    
    (13,053
    )
    
    
    (13,075
    )Net deferred tax asset
    
    $
    44,427
    
    
    $
    39,964
   67




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CARDIAC SCIENCE CORPORATION. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  Year ended December 31,2006
    
    
    2005
    
    
    2004U.S.
    
    $
    (1,184
    )
    
    $
    (2,679
    )
    
    $
    6,237Foreign
    
    
    564
    
    
    
    (63
    )
    
    
    (98
    )Total
    
    $
    (620
    )
    
    $
    (2,742
    )
    
    $
    6,139
  13. Commitments and Contingencies
 Lease Commitments
   OperatingLeases, NetOperating
    
    
    of SubleaseLeases
    
    
    IncomeYear:2007
    
    $
    2,855
    
    
    $
    2,5222008
    
    
    2,441
    
    
    
    2,2492009
    
    
    862
    
    
    
    8462010
    
    
    741
    
    
    
    7412011
    
    
    753
    
    
    
    753Thereafter
    
    
    1,812
    
    
    
    1,812Total
    
    $
    9,464
    
    
    $
    8,923
  Other Commitments
  68




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##### Table of Contents



CARDIAC SCIENCE CORPORATION. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 Guarantees and Indemnities
  Performance Guarantees
  Legal Proceedings
     69




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CARDIAC SCIENCE CORPORATION. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 14. Shareholders Equity
 Preferred Stock
  Common Stock
     WarrantsOutstanding and
    
    Exercise Price
    
    ExpirationGrant Date
    
    Exercisable
    
    per Share
    
    Date1997
    
    
    7,500
    
    
    $
    22.50
    
    
    
    20072002
    
    
    1,500
    
    
    
    18.00
    
    
    
    20072002
    
    
    2,500
    
    
    
    17.50
    
    
    
    20122003
    
    
    1,500
    
    
    
    32.70
    
    
    
    20082003
    
    
    75,000
    
    
    
    30.00
    
    
    
    20072003
    
    
    10,000
    
    
    
    46.10
    
    
    
    20082003
    
    
    22,333
    
    
    
    50.00
    
    
    
    20082004
    
    
    1,500
    
    
    
    19.50
    
    
    
    20092004
    
    
    208,776
    
    
    
    25.00
    
    
    
    2009Total
    
    
    330,609Weighted average exercise price
    
    
    
    
    
    $
    28.33
 70




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##### Table of Contents



CARDIAC SCIENCE CORPORATION. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 15. Stock-Based Compensation Plans
     71




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##### Table of Contents



CARDIAC SCIENCE CORPORATION. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  Year endedDecember 31, 2006As Reported
    
    If ReportedFollowing
    
    Following(in thousands, except per share data)
    
    SFAS 123R
    
    APB 25Condensed Consolidated Statement of Operations:Operating income (loss)
    
    $
    (1,386
    )
    
    $
    344Income (loss) before income taxes and minority interest
    
    $
    (620
    )
    
    $
    1,110Net income
    
    $
    49
    
    
    $
    1,548Net income per share:Basic
    
    $
    0.00
    
    
    $
    0.07Diluted
    
    $
    0.00
    
    
    $
    0.07Condensed Consolidated Statement of Cash Flows:Net cash provided by operating activities
    
    $
    8,683
    
    
    $
    8,683Net cash provided by financing activities
    
    $
    897
    
    
    $
    897
  Year ended December 31,(in thousands, except per share data)
    
    2005
    
    
    2004Net income (loss)  as reported
    
    $
    (1,238
    )
    
    $
    15,068Add back: Stock-based employee compensation expense included in
reported income, net of related tax effects
    
    
    58
    
    
    
    73Deduct: Total stock-based employee compensation expense determined
under fair value based method for all awards, net of related tax effect of
$926 and $376, respectively
    
    
    (3,673
    )
    
    
    (1,737
    )Net income (loss)  pro forma
    
    $
    (4,853
    )
    
    $
    13,404Net income (loss) per share as reported  basic
    
    $
    (0.08
    )
    
    $
    1.47Net income (loss) per share as reported  diluted
    
    $
    (0.08
    )
    
    $
    1.39Net income
(loss) per share pro forma  basic
    
    $
    (0.33
    )
    
    $
    1.31Net income (loss) per share pro forma  diluted
    
    $
    (0.33
    )
    
    $
    1.28
 72




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CARDIAC SCIENCE CORPORATION. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  Year ended December 31,2006
    
    2005
    
    2004Stock options plans:Volatility
    
    
    52.6% - 56.0
    %
    
    
    59.0% - 62.0
    %
    
    
    70.0
    %Expected term (years)
    
    
    6.25
    
    
    
    6.25
    
    
    
    7.00Risk-free interest rate
    
    
    4.6
    %
    
    
    4.5
    %
    
    
    3.8
    %Expected dividend yield
    
    
    
    
    
    
    
    
    
    
    Fair value of options granted
    
    $
    4.99
    
    
    $
    5.71
    
    
    $
    8.29Employee stock purchase plan:Volatility
    
    
    34.0
    %
    
    
    64.6
    %
    
    
    70.0
    %Expected term (years)
    
    
    0.5
    
    
    
    0.5
    
    
    
    0.5Risk-free interest rate
    
    
    4.4
    %
    
    
    2.7
    %
    
    
    2.0
    %Expected dividend yield
    
    
    
    
    
    
    
    
    
    
    Fair value of employee stock purchase rights
    
    $
    2.37
    
    
    $
    4.44
    
    
    $
    3.29Non-vested stock:Fair value of non-vested stock awards granted
    
    $
    8.25
    
    
    $
    
    
    
    $
    
   Stock Option Plans
   73




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##### Table of Contents



CARDIAC SCIENCE CORPORATION. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
   Outstanding shares - 2002 Plan
    
    
    2,180,550Outstanding shares - 1997 Plan
    
    
    1,159,505Stock options available for grant
    
    
    621,087Outstanding restricted stock grants
    
    
    159,409Employee stock purchase plan shares available for issuance
    
    
    567,894Total common shares reserved
for future issuance
    
    
    4,688,445
 2002 Plan 
   Shares
    
    
    Weighted Average
    
    
    Weighted Average
    
    
    Aggregate IntrinsicSubject to
    
    
    Exercise Price
    
    
    Remaining
    
    
    ValueOptions
    
    
    per Share
    
    
    Contractual Life
    
    
    (in thousands)Outstanding,
December 31, 2005
    
    
    1,960,525
    
    
    $
    7.67Granted
    
    
    435,000
    
    
    
    8.87Exercised
    
    
    (79,013
    )
    
    
    2.91Cancelled
    
    
    (135,962
    )
    
    
    9.99Outstanding,
December 31, 2006
    
    
    2,180,550
    
    
    $
    7.92
    
    
    6.7 years
    
    $
    3,234Exercisable,
December 31, 2006
    
    
    1,607,944
    
    
    $
    7.32
    
    
    6.0 years
    
    $
    3,234
 74




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CARDIAC SCIENCE CORPORATION. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  Outstanding
    
    
    ExercisableWeighted-Weighted-
    
    
    Average
    
    
    
    
    
    
    Weighted-Average
    
    
    Remaining
    
    
    
    
    
    
    AverageNumber of
    
    
    Exercise
    
    
    Contractual
    
    
    Number of
    
    
    ExerciseRange of Exercise Prices
    
    Options
    
    
    Price
    
    
    Life
    
    
    Options
    
    
    Price$0.00 - $1.08
    
    
    31,634
    
    
    $
    0.29
    
    
    1.9 years
    
    
    31,634
    
    
    $
    0.29$1.09 - $2.42
    
    
    6,138
    
    
    
    1.31
    
    
    2.4 years
    
    
    6,138
    
    
    
    1.31$2.43 - $3.25
    
    
    553,592
    
    
    
    2.85
    
    
    3.7 years
    
    
    553,592
    
    
    
    2.85$3.26 - $4.51
    
    
    4,321
    
    
    
    4.27
    
    
    5.0 years
    
    
    4,321
    
    
    
    4.27$4.52 - $7.59
    
    
    7,718
    
    
    
    6.99
    
    
    6.2 years
    
    
    7,718
    
    
    
    6.99$7.60 - $8.79
    
    
    548,621
    
    
    
    8.18
    
    
    8.6 years
    
    
    180,849
    
    
    
    7.77$8.80 - $10.84
    
    
    579,418
    
    
    
    9.84
    
    
    7.4 years
    
    
    565,537
    
    
    
    9.83$10.85 - $12.95
    
    
    440,620
    
    
    
    12.00
    
    
    7.6 years
    
    
    250,083
    
    
    
    12.15$12.96 - $14.25
    
    
    8,488
    
    
    
    13.34
    
    
    7.5 years
    
    
    8,072
    
    
    
    13.36$0.00 - $14.25
    
    
    2,180,550
    
    
    $
    7.92
    
    
    6.7 years
    
    
    1,607,944
    
    
    $
    7.32
 1997 Plan 
   Shares
    
    
    Weighted Average
    
    
    Weighted Average
    
    
    Aggregate IntrinsicSubject to
    
    
    Exercise Price
    
    
    Remaining
    
    
    ValueOptions
    
    
    per Share
    
    
    Contractual Life
    
    
    (in thousands)Outstanding, December 31, 2005
    
    
    1,274,748
    
    
    $
    25.04Granted
    
    
    52,500
    
    
    
    8.38Cancelled
    
    
    (167,743
    )
    
    
    23.42Outstanding, December 31, 2006
    
    
    1,159,505
    
    
    $
    24.50
    
    
    6.0 years
    
    $
    Exercisable, December 31, 2006
    
    
    1,100,655
    
    
    $
    25.26
    
    
    5.8 years
    
    $
    
 75




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CARDIAC SCIENCE CORPORATION. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  Outstanding
    
    
    ExercisableWeighted-Weighted-
    
    
    Average
    
    
    
    
    
    
    Weighted-Average
    
    
    Remaining
    
    
    
    
    
    
    AverageNumber of
    
    
    Exercise
    
    
    Contractual
    
    
    Number of
    
    
    ExerciseRange of Exercise Prices
    
    Options
    
    
    Price
    
    
    Life
    
    
    Options
    
    
    Price$7.60 - $8.79
    
    
    52,500
    
    
    $
    8.38
    
    
    10.0 years
    
    
    
    
    
    $
    $8.80 - $10.84
    
    
    63,825
    
    
    
    9.12
    
    
    8.8 years
    
    
    63,825
    
    
    
    9.12$10.85 - $12.95
    
    
    8,800
    
    
    
    11.10
    
    
    8.3 years
    
    
    8,800
    
    
    
    11.10$12.96 - $17.50
    
    
    115,975
    
    
    
    17.39
    
    
    5.8 years
    
    
    114,725
    
    
    
    17.38$17.51 - $20.60
    
    
    537,175
    
    
    
    20.30
    
    
    5.2 years
    
    
    534,675
    
    
    
    20.31$20.61 - $22.40
    
    
    10,950
    
    
    
    22.22
    
    
    6.5 years
    
    
    10,950
    
    
    
    22.22$22.41- $24.60
    
    
    55,645
    
    
    
    24.20
    
    
    5.7 years
    
    
    55,645
    
    
    
    24.20$24.61 - $26.00
    
    
    32,000
    
    
    
    26.00
    
    
    6.4 years
    
    
    32,000
    
    
    
    26.00$26.01 - $36.50
    
    
    24,500
    
    
    
    35.20
    
    
    6.9 years
    
    
    24,400
    
    
    
    35.20$36.51 - $41.50
    
    
    196,742
    
    
    
    39.96
    
    
    6.1 years
    
    
    194,242
    
    
    
    39.98$41.51 - $50.70
    
    
    29,500
    
    
    
    46.05
    
    
    6.2 years
    
    
    29,500
    
    
    
    46.05$50.71 - $60.00
    
    
    31,893
    
    
    
    58.37
    
    
    3.6 years
    
    
    31,893
    
    
    
    58.37$7.60 - $60.00
    
    
    1,159,505
    
    
    $
    24.50
    
    
    6.0 years
    
    
    1,100,655
    
    
    $
    25.26
 Non-vested Stock Awards 
    Weighted AverageShares
    
    
    Grant-Date Fair ValueNon-vested balance,
December 31, 2005
    
    
    104,350
    
    
    $
    9.38Granted
    
    
    101,650
    
    
    
    8.25Vested
    
    
    (23,516
    )
    
    
    9.39Cancelled
    
    
    (23,075
    )
    
    
    9.08Non-vested balance,
December 31, 2006
    
    
    159,409
    
    
    $
    8.70
 Employee Stock Purchase Plan 
 76




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##### Table of Contents



CARDIAC SCIENCE CORPORATION. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
   16. Employee Benefit Plans
   17. SEC Staff Accounting Bulletin No. 108
  Lease Accounting
  77




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##### Table of Contents



CARDIAC SCIENCE CORPORATION. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 18. Quarterly Results of Operations (Unaudited)
   March 31,
    
    
    June 30,
    
    
    September 30,
    
    
    December 31,
    
    
    March 31,
    
    
    June 30,
    
    
    September 30,
    
    
    December 31,2005
    
    
    2005
    
    
    2005
    
    
    2005
    
    
    2006
    
    
    2006
    
    
    2006
    
    
    2006Consolidated Statements
of Operations Data:Revenues
    
    $
    21,330
    
    
    $
    21,968
    
    
    $
    27,446
    
    
    $
    35,906
    
    
    $
    39,115
    
    
    $
    39,221
    
    
    $
    38,116
    
    
    $
    38,977Cost of Revenues
    
    
    11,564
    
    
    
    12,093
    
    
    
    15,168
    
    
    
    20,969
    
    
    
    20,722
    
    
    
    20,631
    
    
    
    20,048
    
    
    
    20,794Gross profit
    
    
    9,766
    
    
    
    9,875
    
    
    
    12,278
    
    
    
    14,937
    
    
    
    18,393
    
    
    
    18,590
    
    
    
    18,068
    
    
    
    18,183Operating Expenses:Research and development
    
    
    1,809
    
    
    
    1,908
    
    
    
    2,262
    
    
    
    3,374
    
    
    
    2,970
    
    
    
    2,875
    
    
    
    2,792
    
    
    
    3,096Sales
    
    
    3,968
    
    
    
    3,944
    
    
    
    5,666
    
    
    
    7,860
    
    
    
    7,543
    
    
    
    8,059
    
    
    
    8,443
    
    
    
    8,843Marketing
    
    
    689
    
    
    
    648
    
    
    
    935
    
    
    
    1,247
    
    
    
    1,840
    
    
    
    1,855
    
    
    
    1,602
    
    
    
    1,775General and administrative
    
    
    2,045
    
    
    
    2,266
    
    
    
    4,697
    
    
    
    6,118
    
    
    
    5,811
    
    
    
    5,916
    
    
    
    5,863
    
    
    
    5,337Total operating expenses
    
    
    8,511
    
    
    
    8,766
    
    
    
    13,560
    
    
    
    18,599
    
    
    
    18,164
    
    
    
    18,705
    
    
    
    18,700
    
    
    
    19,051Operating income (loss)
    
    
    1,255
    
    
    
    1,109
    
    
    
    (1,282
    )
    
    
    (3,662
    )
    
    
    229
    
    
    
    (115
    )
    
    
    (632
    )
    
    
    (868
    )Other Income (Expense):Interest income (expense), net
    
    
    113
    
    
    
    145
    
    
    
    123
    
    
    
    (56
    )
    
    
    (50
    )
    
    
    (5
    )
    
    
    18
    
    
    
    21Other income (expense), net
    
    
    61
    
    
    
    53
    
    
    
    34
    
    
    
    (635
    )
    
    
    231
    
    
    
    274
    
    
    
    94
    
    
    
    183Total other income (expense)
    
    
    174
    
    
    
    198
    
    
    
    157
    
    
    
    (691
    )
    
    
    181
    
    
    
    269
    
    
    
    112
    
    
    
    204Income
(loss) before income tax benefit (expense) and minority interest
    
    
    1,429
    
    
    
    1,307
    
    
    
    (1,125
    )
    
    
    (4,353
    )
    
    
    410
    
    
    
    154
    
    
    
    (520
    )
    
    
    (664
    )Income tax benefit (expense)
    
    
    (470
    )
    
    
    (434
    )
    
    
    558
    
    
    
    1,819
    
    
    
    (159
    )
    
    
    (49
    )
    
    
    209
    
    
    
    614Income (loss) before minority interest
    
    
    959
    
    
    
    873
    
    
    
    (567
    )
    
    
    (2,534
    )
    
    
    251
    
    
    
    105
    
    
    
    (311
    )
    
    
    (50
    )Minority interest
    
    
    20
    
    
    
    6
    
    
    
    (2
    )
    
    
    7
    
    
    
    13
    
    
    
    13
    
    
    
    13
    
    
    
    15Net income (loss)
    
    $
    979
    
    
    $
    879
    
    
    $
    (569
    )
    
    $
    (2,527
    )
    
    $
    264
    
    
    $
    118
    
    
    $
    (298
    )
    
    $
    (35
    )Net income (loss) per share  basic
    
    $
    0.09
    
    
    $
    0.08
    
    
    $
    (0.04
    )
    
    $
    (0.11
    )
    
    $
    0.01
    
    
    $
    0.01
    
    
    $
    (0.01
    )
    
    $
    (0.00
    )Net income (loss) per share  diluted
    
    $
    0.09
    
    
    $
    0.08
    
    
    $
    (0.04
    )
    
    $
    (0.11
    )
    
    $
    0.01
    
    
    $
    0.01
    
    
    $
    (0.01
    )
    
    $
    (0.00
    )
 78




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SCHEDULE IIVALUATION AND QUALIFYING ACCOUNTS
 (In Thousands)
  Increase
    
    ExpensesBeginning
    
    Through
    
    and
    
    
    
    
    
    End of(in thousands)
    
    of Period
    
    Acquisition
    
    Adjustments
    
    Write-offs
    
    PeriodYear Ended December 31, 2006
    
    $
    3,455
    
    
    $
    
    
    
    $
    216
    
    
    $
    (2,764
    )
    
    $
    907Year Ended December 31, 2005
    
    
    655
    
    
    
    2,597
    
    
    
    478
    
    
    
    (275
    )
    
    
    3,455Year Ended December 31, 2004
    
    
    663
    
    
    
    
    
    
    
    205
    
    
    
    (213
    )
    
    
    655
 79




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##### Table of Contents



Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
  
 Item 9A. Controls and Procedures
 Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
  Managements Report on Internal Control Over Financial Reporting
   Changes in Internal Controls
  
 Item 9B. Other Information
  80




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##### Table of Contents



PART III
 
 Item 10. Directors, Executive Officers and Corporate Governance
  
 Item 11. Executive Compensation
  
 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
  
 Item 13. Certain Relationships and Related Transactions, and Director Independence
  
 Item 14. Principal Accountant Fees and Services.
  81




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PART IV
 
 ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
 
 (1)
    
    Consolidated Financial Statements: See Index to Financial Statements at
Item 8 on page 42  of this report.(2)
    
    Financial Statement Schedule: See Schedule II  Valuation and
Qualifying Accounts on page 79  of this report.(3)
    
    Exhibits are incorporated herein by reference or are filed with this
report: See Index to Exhibits following the signature page of this report.
    82




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##### Table of Contents



SIGNATURES
  Cardiac Science CorporationBy:
    /s/      Michael K. MatysikMichael K. MatysikChief Financial Officer   Signature
    
    Title
    
    Date/s/ JOHN R. HINSON
 John
R. Hinson
    
    President, Chief Executive Officer and
Director (Principal Executive Officer)
    
    March 16, 2007/s/ MICHAEL K. MATYSIK
 Michael
K. Matysik
    
    Senior Vice President and Chief
Financial Officer (Principal
Financial Officer)
    
    March 16, 2007/s/ DAPHNE TAYLOR
 Daphne
Taylor
    
    Vice President and Corporate Controller
(Principal Accounting Officer)
    
    March 16, 2007/s/ RUEDIGER NAUMANN-ETIENNE
 Ruediger
Naumann-Etienne
    
    Chairman of the Board
    
    March 16, 2007/s/ W. ROBERT BERG
 W.
Robert Berg
    
    Director
    
    March 16, 2007/s/ JUE-HSIEN CHERN
 Jue-Hsien
Chern
    
    Director
    
    March 16, 2007/s/ RAYMOND W. COHEN
 Raymond W. Cohen
    
    Director
    
    March 16, 2007/s/ TIMOTHY C. MICKELSON
 Timothy
C. Mickelson
    
    Director
    
    March 16, 2007/s/ RAY E. NEWTON, III
 Ray
E. Newton, III
    
    Director
    
    March 16, 2007/s/ JEFFREY F. ODONNELL, SR.
 Jeffrey
F. ODonnell, Sr.
    
    Director
    
    March 16, 2007
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##### Table of Contents



ExhibitNumber
    
    Description2.1
    
    Agreement and Plan of Merger dated as of February 28, 2005, as amended on June 23, 2005,
among Quinton Cardiology Systems, Inc., Cardiac Science, Inc., CSQ Holding Company,
Rhythm Acquisition Corporation, and Heart Acquisition Corporation (1)2.2
    
    Stock Purchase Agreement dated December 23, 2002 by and among Spacelabs Medical, Inc.,
Spacelabs Burdick, Inc., Quinton Cardiology Systems, Inc. and Datex-Ohmeda, Inc. (3)3.1
    
    Amended and Restated Certificate of Incorporation (2)3.2
    
    Amended and Restated Bylaws (21)4.1
    
    Specimen Stock Certificate (2)4.2
    
    Common Stock and Warrant Purchase Agreement, dated July 20, 2004, by and among Cardiac
Science, Inc., Perseus Market Opportunity Fund, L.P., Winterset Master Fund, L.P., Mill
River Master Fund, L.P., Massachusetts Mutual Life Insurance Company and Walter Villager
(17)4.3
    
    Second Amended and Restated Registration Rights Agreement, dated as of February 28, 2005,
by and among Cardiac Science, Inc., and the investors listed on the signature pages
thereto (27)4.4
    
    Form of Warrant (17)4.5
    
    Form of Warrant issued to Perseus Acquisition /Recapitalization Fund, L.L.C., Perseus
Market Opportunity Fund, L.P. and Cardiac Science Co-Investment, L.P. (18)10.1
    
    Senior Note and Warrant Conversion Agreement dated as of February 28, 2005 among CSQ
Holding Company, Cardiac Science, Inc. and the purchasers listed on the signature pages
thereto (27)10.2 *
    
    Amended and Restated Employment Agreement dated as of September 20, 2006 between Cardiac
Science Corporation and John R. Hinson (26)10.3
    
    Assumption and Amendment Agreement dated as of September 28, 2005 among Silicon Valley
Bank, Cardiac Science Corporation, Quinton Cardiology, Inc. and Cardiac Science Operating
Company (19)10.4
    
    Lease Termination Agreement effective as of September 14, 2005 between Cardiac Science,
Inc. and Terrace Tower Orange County, LLC (20)10.5*
    
    Quinton Cardiology Systems, Inc. 1998 Amended and Restated Equity Incentive Plan (4)10.6*
    
    Quinton Cardiology Systems, Inc. 2002 Stock Incentive Plan (4)10.7*
    
    Quinton Cardiology Systems, Inc. 2002 Employee Stock Purchase Plan (4)10.8*
    
    Cardiac Science Corporation Stock Option Grant Program for Nonemployee Directors10.10
    
    OEM Agreement between Quinton Inc. and Mortara Instrument, Inc. dated August 1, 2000 (4)10.11
    
    OEM Agreement between Quinton Inc. and Mortara Instrument, Inc. dated October 17, 2000 (4)10.12
    
    OEM Agreement between Quinton Inc. and Mortara Instrument, Inc. dated October 1, 2001 (6)10.13
    
    Addendum No. 1 to the OEM Agreement between Mortara Instrument, Inc. and Quinton Inc.
dated August 1, 2001 (4)10.14
    
    Loan and Security Agreement between Quinton Cardiology Systems, Inc. and Quinton Inc. and
Silicon Valley Bank dated December 30, 2002 (7)10.15
    
    Amendment to Loan Documents between Quinton Cardiology Systems, Inc., Quinton Inc. and
Burdick, Inc. and Silicon Valley Bank dated January 9, 2003 (7)10.16
    
    Streamline Facility Agreement between Quinton Cardiology Systems, Inc. and Quinton Inc.
and Silicon Valley Bank dated as of December 30, 2002 (7)
 84




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##### Table of Contents



ExhibitNumber
    
    Description10.17
    
    Cross-Corporate Continuing Guaranty between Quinton Cardiology Systems, Inc. and Quinton
Inc. and Silicon Valley Bank dated December 30, 2002 (7)10.18
    
    Intellectual Property Security Agreement between Quinton Cardiology Systems, Inc. and
Quinton Inc. and Silicon Valley Bank dated December 30, 2002 (7)10.19
    
    Assumption Agreement between Quinton Cardiology Systems, Inc., Quinton Inc. and Burdick,
Inc. and Silicon Valley Bank dated January 9, 2003 (7)10.20
    
    Cross-Corporate Continuing Guaranty between Burdick Inc. and Silicon Valley Bank dated
January 9, 2003 (7)10.21
    
    Intellectual Property Security Agreement between Burdick, Inc. and Silicon Valley Bank
dated January 9, 2003 (7)10.22
    
    Lease Agreement between Carl Ruedebusch LLC and Burdick, Inc. regarding premises at
Deerfield Industrial Park in Deerfield, Wisconsin dated as of April 6, 1998 (7)10.23
    
    Lease Agreement between Quinton Cardiology Systems, Inc. and Hibbs/ Woodinville
Associates, L.L.C. regarding premises at Bothell, Washington, dated August 29, 2003 (8)10.24*
    
    Form of Quinton Cardiology Systems, Inc. Stock Option Grant Notice and Stock Option
Agreement (This exhibit represents other substantially identical documents that have been
omitted because they are substantially identical to this document in all material
respects and an Appendix attached to this exhibit sets forth material details by which
the omitted documents differ from this exhibit.) (9)10.25*
    
    Quinton Cardiology Systems, Inc. Stock Option Grant Notice and Stock Option Agreement
between Quinton Cardiology Systems, Inc. and Atul Jhalani, dated as of October 23, 2003
(9)10.26*
    
    Amended and Restated Employment Agreement dated as of September 20, 2006 between Cardiac
Science Corporation and Michael K. Matysik (26)10.27*
    
    Amended and Restated Employment Agreement dated as of September 20, 2006 between Cardiac
Science Corporation and Darryl Lustig (26)10.28*
    
    Quinton Cardiology Systems, Inc. Stock Option Grant Notice and Stock Option Agreement
between Quinton Cardiology Systems, Inc. and Allan Criss, dated as of March 10, 2004 (10)10.30
    
    Amendment to Loan Documents between Quinton Cardiology Systems, Inc., Quinton Cardiology,
Inc. and Silicon Valley Bank dated December 30, 2004 (12)10.32*
    
    Form of Stock Option Grant Notice and Stock Option Agreement for grants made pursuant to
the Quinton Cardiology Systems, Inc. 2002 Stock Incentive Plan (25)10.33*
    
    Cardiac Science Corporation Senior
Executives  2006 Base Compensation10.36++
    
    OEM Purchase and Supply Agreement between Cardiac Science, Inc. and GE Medical Systems
Information Technologies, Inc. dated July 29, 200310.37++
    
    Addendum 1 dated as of March 24, 2004 to OEM Purchase and Supply Agreement between
Cardiac Science, Inc. and GE Medical Systems Information Technologies, Inc. dated July
29, 200310.38
    
    Amendment One dated August 10, 2004 to OEM Purchase and Supply Agreement between Cardiac
Science, Inc. and GE Medical Systems Information Technologies, Inc. dated July 29, 200310.39
    
    Second Amendment dated February 14, 2005 to OEM Purchase and Supply Agreement between
Cardiac Science, Inc. and GE Medical Systems Information Technologies, Inc. dated July
29, 200310.40++
    
    OEM Purchase Agreement between Cardiac Science, Inc. and GE Medical Systems Information
Technologies, Inc. dated July 29, 200310.41*
    
    Quinton Cardiology Systems, Inc. Stock Option Grant Notice and Stock Option Agreement
between
 85




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##### Table of Contents



ExhibitNumber
    
    DescriptionQuinton Cardiology Systems, Inc. and Feroze Motafram dated as of July 23, 2003
(13)10.42
    
    Amendment One dated August 10, 2004 to OEM Purchase Agreement between Cardiac Science,
Inc. and GE Medical Systems Information Technologies, Inc. dated July 29, 200310.43*
    
    Cardiac Science, Inc. 1997 Stock Option/Stock Issuance Plan, as amended (14)10.44
    
    Second Amendment dated February 14, 2005 to OEM Purchase Agreement between Cardiac
Science, Inc. and GE Medical Systems Information Technologies, Inc. dated July 29, 200310.45*
    
    Amended and Restated Employment Agreement dated as of September 20, 2006 between Cardiac
Science Corporation and Kurt Lemvigh (26)10.46
    
    Third Amendment, dated June 10, 2005, to the OEM Purchase Agreement dated July 29, 2003,
as amended, between Cardiac Science, Inc. and GE Medical Systems Information
Technologies, Inc. (18)10.47+
    
    Third Amendment, dated June 10, 2005, to the OEM Purchase and Supply Agreement dated July
29, 2003, as amended, between Cardiac Science, Inc. and GE Medical Systems Information
Technologies, Inc. (18)10.48+
    
    Exclusive Distribution Agreement for United States and Canadian Hospitals dated June 13,
2005, between Cardiac Science, Inc. and GE Medical Systems Information Technologies, Inc.
(18)10.50*
    
    Employment Agreement effective September 1, 2005 between Cardiac Science Corporation and
Raymond W. Cohen (21)10.51*
    
    Letter Agreement dated as of November 9, 2005 between Cardiac Science Corporation and
Ruediger Naumann-Etienne (21)10.52*
    
    Form of Indemnification Agreement (21)10.53*
    
    Summary of Non-Employee Director Compensation (21)10.54*
    
    Cardiac Science Corporation 2006 Management Incentive Plan (22)1056*
    
    Severance and Release Agreement dated as of April 26, 2006 between Cardiac Science
Corporation and Peter Foster (23)10.57*
    
    Form of 1997 Stock Option/Stock Issuance Plan Grant Notice and Option Agreement (24)10.58*
    
    2006 Compensation Incentive Plan for Darryl Lustig (26)10.59++
    
    Fourth Amendment dated October 25, 2006 to OEM Purchase Agreement between Cardiac Science
Corporation and GE Medical Systems Information Technologies, Inc. dated July 29, 200310.60*
    
    Form of Cardiac Science Corporation Stock Option Grant Notice under 2002 Stock Incentive
Plan for Non-Employee Directors21.1
    
    Subsidiaries23.1
    
    Consent of Independent Registered Public Accounting Firm31.1
    
    Certification of Chief Executive Officer pursuant to Section 302(a) of the Sarbanes-Oxley
Act of 2002.
 86




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##### Table of Contents



ExhibitNumber
    
    Description31.2
    
    Certification of Chief Financial Officer pursuant to Section 302(a) of the Sarbanes-Oxley
Act of 2002.32.1
    
    Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2
    
    Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 *
    
    Indicates management contract or compensatory plan or arrangement.+
    
    Portions of this exhibit are omitted and were filed separately with the Securities and
Exchange Commission pursuant to Cardiac Science Inc.s application requesting confidential
treatment under Rule 24b-2 of the Securities Exchange Act of
1934, as amended.++
    
    Portions of this exhibit are omitted and were filed
separately with the Securities and Exchange Commission pursuant to
Cardiac Science Corporations application requesting
confidential treatment under Rule 24b-2 of the Securities and
Exchange Act of 1934, as amended.(1)
    
    Incorporated by reference to the Registrants Amendment No. 3 to the Registration Statement
on Form S-4/A (File No. 333-124514) filed on July 28, 2005.(2)
    
    Incorporated by reference to the Registrants Current Report on Form 8-K (File No. 000-51512)
filed on September 1, 2005.(3)
    
    Incorporated by reference to Quinton Cardiology Systems, Inc.s Current Report on Form 8-K
(File No. 000-49755) filed on January 17, 2003.(4)
    
    Incorporated by reference to Quinton Cardiology Systems, Inc.s Registration Statement on
Form S-1 (File No. 333-83272) filed on February 22, 2002.(5)
    
    Incorporated by reference to Quinton Cardiology Systems, Inc.s Amendment No. 1 to the
Registration Statement on Form S-1/A (File No. 333-83272) filed on March 26, 2002.(6)
    
    Incorporated by reference to Quinton Cardiology Systems, Inc.s Amendment No. 3 to the
Registration Statement on Form S-1/A (File No. 333-83272) filed on April 3, 2002.(7)
    
    Incorporated by reference to Quinton Cardiology Systems, Inc.s Annual Report on Form 10-K
for the year ended December 31, 2002 (File No. 000-49755).(8)
    
    Incorporated by reference to Quinton Cardiology Systems, Inc.s Quarterly Report on Form 10-Q
for the quarter ended September 30, 2003 (File No. 000-49755).(9)
    
    Incorporated by reference to Quinton Cardiology Systems, Inc.s Annual Report on Form 10-K
for the year ended December 31, 2003 (File No. 000-49755).(10)
    
    Incorporated by reference to Quinton Cardiology Systems, Inc.s Quarterly Report on Form 10-Q
for the quarter ended March 31, 2004 (File No. 000-49755).(11)
    
    Incorporated by reference to Quinton Cardiology Systems, Inc.s Quarterly Report on Form 10-Q
for the quarter ended June 30, 2004 (File No. 000-49755).(12)
    
    Incorporated by reference to Quinton Cardiology Systems, Inc.s Current Report on Form 8-K
(File No. 000-49755) filed on January 5, 2005.(13)
    
    Incorporated by reference to Quinton Cardiology Systems, Inc.s Annual Report on Form 10-K
for the year ended December 31, 2004 (File No. 000-49755).(14)
    
    Incorporated by reference to Cardiac Science, Inc.s Definitive Proxy Statement for the
Annual Meeting of Stockholders (File No. 000-19567) held on September 9, 2002.(15)
    
    Incorporated by reference to Cardiac Science, Inc.s Current Report on Form 8-K (File No.
000-19567) filed on March 27, 2001.(16)
    
    Incorporated by reference to Cardiac Science, Inc.s Annual Report on Form 10-K for the year
ended December 31, 2002 (File No. 000-19567).(17)
    
    Incorporated by reference to Cardiac Science, Inc.s Current Report on Form 8-K (File No.
000-19567) filed on July 22, 2004.(18)
    
    Incorporated by reference to Cardiac Science, Inc.s Quarterly Report on Form 10-Q for the
quarter ended June 30, 2005 (File No. 000-19567).(19)
    
    Incorporated by reference to the Registrants Current Report on Form 8-K (File No. 000-51512)
filed on September 30, 2005.(20)
    
    Incorporated by reference to the Registrants Current Report on Form 8-K (File No. 000-51512)
filed on October 3, 2005.(21)
    
    Incorporated by reference to the Registrants Current Report on Form 8-K (File No. 000-51512)
filed November 15, 2005.(22)
    
    Incorporated by reference to the Registrants Current Report on Form 8-K (File No. 000-51512)
filed February 27, 2006.(23)
    
    Incorporated by reference to the Registrants Current Report on Form 8-K (File No.
000-51512) filed May 2, 2006.(24)
    
    Incorporated by reference to the Registrants Quarterly Report on Form 10-Q for the quarter
ended March 31, 2006 (File No. 000-51512).(25)
    
    Incorporated by reference to the Registrants Quarterly Report on Form 10-Q for the quarter
ended June 30, 2006 (File No. 000-51512).(26)
    
    Incorporated by reference to the Registrants Current Report on Form 8-K (File No. 000-51512)
filed September 22, 2006.(27)
    
    Incorporated by reference to Registrants Registration
Statement on Form S-4 (File No. 333-124514) filed on
May 2, 2005. 87